English
The term sukuk is derived from the Arabic word sakk (ﺻﻚ), which means a legal instrument, deed, or cheque.
In Lisan al-Arab, sakk is defined as "to affix one’s seal on a document." Since Arab traders traveled for business from their home countries to Africa and other regions, it is reasonable to believe that the term "cheque" originated from sakk. Additionally, the term sakk was also used during the time of the Holy Prophet (P.B.U.H), as mentioned in certain Hadiths
Indeed, Ibn Umar and Zaid bin Thabit both not looking at anything to sell food (which has not held or occupied), if it is in the form of sukuk Qathut and they say, “Do not sell it until you possess it.”
From Nafi, he said,” It was reported to me that Judge bin Hizam bought sukuk of food and Umar forbade him selling it until he possesses it.
Based on the two Hadiths mentioned above, we can conclude that the term sukuk was also used during the era of the Prophet (P.B.U.H). (Asiva Noor Rachmayani, 2015)
In recent years, the term Sukuk has become more common as Islamic financial institutions recognized the need for alternatives to treasury bills and bonds. For example, the Bahrain government successfully issued Salam Sukuk as an alternative to treasury bills and Ijarah Sukuk as an alternative to bonds. (Usmani, 2015)
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines investment Sukuk as documents of equal value that represent undivided shares in the ownership of assets, benefits, services, or specific projects or private investment activities.
This occurs after the value of the Sukuk is collected, the subscription is closed, and they are utilized for the purpose for which they were issued. (Ummah, 2019)
Meanwhile, the Securities Commission (SC) of Malaysia defines Sukuk as documents of equal value that represent undivided ownership or investment, in compliance with Shariah principles and rules, as approved by the Shariah Advisory Council (SAC).(Asiva Noor Rachmayani, 2015)
Sukuk funds are a type of Islamic financial instrument like conventional bonds, but they are structured in accordance with Shariah principles.
Sukuk funding is a method of raising funds for projects or other financial activities, ensuring compliance with Shariah by avoiding practices such as usury, gambling, and uncertainty.
Sukuk al Murabaha certificates of equal value issued to finance the purchase of a Murabaha commodity, and the Murabaha commodity becomes owned by the Sukuk holders.
Sukuk al-Musharakah are partnership certificates that represent projects or activities managed on the basis of partnership, with one of the partners or another party appointed to manage them.
Sukuk al-Mudarabah are partnership certificates that represent projects or activities managed on the basis of Mudarabah, with the Mudarib appointed from among the partners or others to manage them.
Sukuk al-Wakalah bil Istismar are partnership certificates that represent projects or activities managed on the basis of an investment agency, with an agent appointed on behalf of the Sukuk holders to manage them.
Sukuk al-Salam are certificates of equal value issued to collect working capital for Salam, with the subject matter of the Salam being owned by the Sukuk holders.
Sukuk al-Istisna are certificates of equal value issued to utilize the collected funds for producing goods, with the manufactured goods being owned by the Sukuk holders. (Ummah, 2019)
Traditional financing refers to a system where loans are obtained for projects through conventional methods, in which the borrower repays the principal amount along with interest over a specified period.
These loans are typically offered by conventional banks, financial institutions, or other private organizations.
Traditional financing includes loans like personal loan, business loan, mortgages and credit line and these types of loans are often contrasted with Islamic financial loans.
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Based on the above definitions of Sukuk and traditional financing, Sukuk represents undivided ownership in specific assets or usufruct,
whereas traditional financing is not concerned with assets or usufruct; it simply represents a debt owed by an institution.
This is the key difference between raising funds through Sukuk and traditional financing. Below are some additional differences that clearly distinguish the two:
i- Sukuk does not represent a debt obligation of the issuer, while traditional financing involves the issuer taking on debt.Sukuk does not represent a debt obligation of the issuer, while traditional financing involves the issuer taking on debt.
ii- In Sukuk, ownership can be claimed on specific assets, usufruct, etc., whereas in traditional financing, the creditor's claim is on the borrowing entity.
iii- Sukuk are secured by ownership rights in underlying assets, whereas bonds are generally unsecured, though in some cases, they may be linked to mortgages or other trust certificates.
v- In Sukuk, the principle and return are not guaranteed by the issuers while in traditional financing the debt instruments are guaranteed.
Both are tradable, in Sukuk the ownership of the specific assets is traded while in bonds the debt certificates are traded.(Asiva Noor Rachmayani, 2015)
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In Sukuk, profit is distributed among the holders according to their proportionate share in the underlying assets, usufruct, or services, while losses are borne in proportion to their stake in the specific asset.
In contrast, interest payments do not involve an actual profit-generating mechanism; this system relies solely on interest-bearing instruments, which are paid to bondholders at the maturity date. (Usmani, 2015)
In Islamic jurisprudence, there is a principle that "Profit comes with risk" or "Gain is accompanied by loss."
Since Sukuk are Shariah-compliant instruments, Sukuk holders are entitled to profits and are also exposed to risks.
In the event of a loss, the Sukuk holders will bear the loss in proportion to their ownership share in the underlying assets, usufructs, and services.
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References:
Asiva Noor Rachmayani. (2015). Fundamental of Islamic Money Market. 6.
Ummah, M. S. (2019). AAOIFI Eng. Sustainability (Switzerland), 11(1), 1–14. Retrieved from http://scioteca.caf.com/bitstream/handle/123456789/1091/RED2017-Eng-8ene.pdf?sequence=12&isAllowed=y%0Ahttp://dx.doi.org/10.1016/j.regsciurbeco.2008.06.005%0Ahttps://www.researchgate.net/publication/305320484_SISTEM_PEMBETUNGAN_TERPUSAT_STRATEGI_MELESTARI
Usmani, M. I. A. (2015). Maktaba Ma’ariful Quran (Quranic Studies Publishers). 342.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
